Weighing up fleet financing options

Impending corporate manslaughter laws add a new layer of complexity for FDs in the sourcing and financing fleets, says Nick Golding

Executive summary
• The decision on how to source and finance company cars has crucial tax and employer risk implications that need to be carefully balanced.
• The most common way that UK employers source company cars is via a contract hire scheme. Under contract hire, employees have to pay benefit-in-kind (BIK) tax on the car.
• BIK also applies to company cars offered under a personal contract purchase (PCP) plan because the employer retains ownership of the company car because the contract is between the employer and the supplier.
• Next to tax, risk is a second crucial issue to consider when deciding how to finance a company car fleet. Under the new corporate manslaughter laws, even if a car driven on business is owned by the employee, and not the employer, the employer is still liable for health and safety.
• Employee car ownership plans (Ecops) do not attract either BIK tax or national insurance but because the employee selects the car, employers may open themselves to risk unless careful checks are made.
• Drivers are reimbursed for the business miles they drive in Ecops via authorised mileage allowance payments (Amaps) – as is the case for any employee driving their own car for business. There is concern that the generous Amap rates will be reduced.
• The third most popular way in which employers source cars is outright purchase. Using the corporate buying power of the organisation to negotiate bulk deals can prove a cost effective route for both bosses and staff.

Offering an employee a choice of car that is either partly or wholly funded by the organisation is a fantastic benefit. In fact 42% of respondent employers to the Employee Benefits/SureFleet fleet research 2008 – admitted that company cars are an essential recruitment tool.

But cars can be an expensive and potentially risky benefit to offer. Therefore, employers really need to do their homework in order to identify how they should go about financing company cars to both suit their business needs and to keep costs and risks to the absolute minimum.

Stewart Whyte, director and membership secretary at the Association of Car Fleet Operators (Acfo), explains: “This is a monumental cost, somewhere between £6,000 and £12,000 per head per year, and a lot more on top of that if you are talking about executive drivers as well.”

Generally company cars are offered to employees via two distinct sourcing methods. Under the first method, cars are chosen and paid for by the employer. This includes cars that are purchased outright by the employer, or those leased under a contract hire scheme agreed between supplier and employer. Under the second method, employees are given a cash allowance, an amount that is usually dependent on seniority, with which to finance their own car.

In the case of cash allowances, the employer can decide whether to allow drivers to go out and buy any car they wish, or the employer may opt to offer a structured car finance scheme such as an employee car ownership plan (Ecop) or a personal contract purchase (PCP) plan.

This decision as to which sourcing route to use has crucial tax and employer risk implications that need to be carefully balanced. The most common way that UK employers source company cars is via a contract hire scheme. According to the previously mentioned fleet research, half of the respondents sourced cars through contract hire schemes.

Under this type of scheme, the employer pays a fixed monthly figure for each car to a leasing company. The monthly figure is calculated by deducting the depreciation value of the car over a set period from the original price of the car. The car can be returned to the leasing company at the end of the agreed period, usually three years or bought by the employer or employee.

Contract hire is the most effective way to guarantee and plan costs for a given period of time. Stuart Menzies, sales director at Grosvenor Contracts Leasing, says: “An employer can give a driver a certain amount of money to spend each month on a contract hire vehicle, and this is the best option for the employer because of the advantages around budgeting, straight payments and there are no unexpected surprises.”

The downside to contract hire is the benefit-in-kind (BIK) tax implications. Under contract hire the employer owns the car, and that ownership status means that BIK tax is payable by the employee. Alastair Kendrick, partner at Bourne Business Consulting, says: “Tax is liable here because the car is considered to be a company car, and until the date of the transfer of ownership to the employee, tax will have to be paid.”

Therefore the employee pays company car tax, which is based on price of the vehicle and its CO2 emissions level – the employer pays national insurance (NI) on that amount. Fortunately, because of the government’s strong desire to keep carbon emissions down, tax breaks are available on cars that produce super-low emissions at 120 grams per kilometre or below. And BIK tax breaks are set to become even more generous from April, when the CO2 quotient falls from 15% to 10%.

The same BIK principle applies to company cars offered under a PCP. PCPs are similar to the contract hire scheme in that the employer retains effective ownership of the company car because the contract is between the employer and the supplier. As a result, BIK, is still be due on the car. But unlike contract hire, individual employees approach the leasing firm directly to select a car, usually within strict guidelines as to the make and model of car.

Next to tax, risk is a second crucial issue to consider when deciding how to finance your company car fleet.

Under the new Corporate Manslaughter Act, which comes into effect in April, an organisation could face prosecution and an unlimited fine in the event of death of an employee caused by gross corporate failings in health and safety. In the past, any prosecution would have had to have shown gross negligence by at least one individual senior company officer or director. This is no longer the case under the tighter new rules.

And a car used for company business is seen as an extension of the workplace, so a motor accident that results from gross corporate failings in health and safety could lead to prosecution. It has quickly become clear, that even if a car driven on business is owned by the employee, and not the employer, the employer is still liable for health and safety. So many employers are taking much closer control of these cars.

So in terms of risk, contract hire schemes and PCPs can help in establishing a liability shield, with the employer being assured that the fleet leasing supplier will look after the vehicle’s MOT, insurance, and regular servicing. In addition, the employer knows that the vehicle being driven is a new car. So overall the chances of employees driving poorly-serviced or not-fit-for-purpose cars are at a minimum. Grosvenor’s Menzies adds: “A contract hire vehicle would be fully maintained, the employer can put in its own parameters around engine size and miles per gallon (MPG), and this is all part of the contract.”

Diametrically opposed to contract hire schemes – in terms of tax and risk – are employee car ownership plans (Ecops). Ecops are where the car is owned by the individual worker. Therefore, there is no BIK tax or NI to be paid, even though the company is technically funding the use of the car.

In simple terms, the employer agrees a sum of cash to award the employee each month and it is agreed that the employee will use that cash to fund the running of a car.

In addition, drivers are reimbursed for the business miles they drive in Ecops via authorised mileage allowance payments (Amaps) – as is the case for any employee driving their own car for business. Employers pay drivers 40p per business mile for the first 10,000 and 25p per mile thereafter, free of tax.

Amaps were originally introduced for public sector employees who were not offered company cars and had to drive business miles in their own car. The generous tax-free rates were set to compensate for the general wear and tear of their cars.

However, the fleet industry is currently awaiting a final decision from HM Revenues & Customs (HMRC) on how Amap rates will be offered in relation to Ecops. A consultation document was published last year, and there is concern that the generous Amap rates might be a target of the Budget on 12 March. If this were to happen, Ecops would instantly become less attractive.

So, with no BIK tax to pay and a currently appealing tax-free option to reimburse business drivers for fuel, wear and tear, Ecops have become financially attractive. Jim Salkeld, chairman at provider firm Toomey Opticar, explains: “The most effective cash option for larger fleets is some form of structured Ecop arrangement.”

But there is a major potential pitfall. FDs should be aware that Ecops could end up costing employers huge sums of money if proper fleet risk checks are not applied to the Ecop vehicles, or indeed other schemes where staff are free to select their own car.

Take a typical example of an employer which offers cash allowances and allows drivers free rein on how they spend the money. An employee is awarded £500 a month in car allowance, and decides to spend just £100 a month on an ‘old banger’, taking the rest of the allowance as a cash bonus. If that employee was then involved in an accident, the employer could be held liable because the company is technically funding the car. “It is very difficult to control something that is not managed by a third party, how do you know about the history of the car, or whether it has ever been serviced?” asks Kendrick. So, in order to reduce this risk, many providers are now offering structured Ecops where they work with the employer to restrict the employees’ selection to certain makes or models or ages of cars. The provider will also ensure that the driver keeps the car serviced and insured with regular reminders.

Richard Schooling, chief operating officer at Alphabet, says: “An Ecop scheme managed by an experienced fleet provider is likely to offer the optimum financial benefits to the employer and driver, while also ensuring that the employer retains a vital insight into both vehicle condition and fitness for purpose.”

While Salkeld adds: “Employees would generally expect to be able to source and fund their own car under a cash allowance option, and as long as the policy for age, suitability, insurance and maintenance is clear and effectively enforced, there should be no problem.”

Outright purchases

The third most popular way in which employers source company cars (after contract hire and employees sourcing their own cars) is outright purchase. Using the corporate buying power of the organisation to negotiate good deals when buying in volume can prove to be highly cost effective.

“It tends to be better for the company to source the car, or range of cars because they have the buying power to offer a discount to employees, and should be corporately controlled,” says Kendrick. But the amount of discount that the employer will be able to negotiate will depend on the manufacturer it is dealing with, and the more prestigious the model the less likely the manufacturer will be willing to negotiate.

“Vauxhall and Ford may offer up to 30% discounts, but BMW may well be a different story,” says Kendrick.

In the case of outright purchases, BIK tax applies, but like contract hire, the employer has much greater control over the risk elements of running company cars.

Sadly, there is no one-size-fits-all scheme, and the issue of risk and cost-effectiveness crops up with each sourcing method. However, if the FD is willing to put in the legwork, the solution may play itself out using a combination of sources that produces a fit for staff that actually have a range of different needs.

Case study
Stuart Bridges, group financial director at Hiscox, is well aware of the risks associated with car allowances. He is keen to see his high-mileage, business-need drivers in a company car scheme, and in a car that has been selected by the firm, while perk-drivers are offered the luxury of greater choice within the Ecop.

“Our [business] need car drivers, such as regional managers who need a car for business get some flexibility around the car they have, but we want them to have a sensible car for when they are driving with clients, for instance,” he says.

The tax breaks and financial advantages of green cars are also on his mind, and while he wants to encourage Ecop drivers into cost-effective, low-tax cars, the final decision is for the driver.

Bridges admits that the car scheme at the insurance group could be more cost-effective, but by making it cost-effective the amount of choice would suffer, and so too would the benefit.

“I think given our desire to give staff so much flexibility, probably our scheme is not that cost-effective. But I think if I reduced the amount of flexibility I could probably save some costs, but then you are taking the benefit away,” he says.